Africa in Focus

Five Questions Answered on Africa’s Rising Economic Growth

There has been a lot of talk about Africa’s rising economic prosperity and whether it is sustainable and deeply rooted in reducing extreme poverty across the continent. So, I sat down to answer some basic fundamental questions that I often get asked about Africa’s growth and development.

Why does Africa show the highest growth prospects out of any continent in the world?

There is no doubt that favorable commodity prices have and will be a key driver of growth for sub-Sahara Africa. The so-called commodity super-cycle has benefited traditional oil exporters, such as Nigeria and Angola, and new ones, like Ghana. Demand for natural resources from emerging markets, especially China, has increased in the last decade and remains important. As noted in the BP Energy Outlook 2035, Africa will remain an important producer of oil and natural gas, accounting for 10 percent of global oil and 9 percent of natural gas production in 2035.

In addition, the continuation of good medium-term policies and structural reforms bodes well for future growth in the region. Africa has “democratized” to some extent, and violence and armed conflicts have decreased in spite of a few hot spots. Half of the world’s future population growth will be driven by Africa (not because of higher fertility, which is declining, but because of longer life expectancy). This trend could lead to a “demographic dividend” of an adult population of 800 million by 2030 (compared to 460 million in 2010). Africa’s rapid urbanization and burgeoning middle class could generate hundreds of millions of consumers.

To sustain its growth, however, Africa will need to continue reducing poverty and inequality, and step up the transformation of its economy. As noted by Dani Rodrik, African countries, unlike East Asian countries, have not yet been able to turn their farmers into manufacturing workers, diversify their economies, and export a range of increasingly sophisticated goods. Moreover, many African countries are joining the resource-rich country club and with it come not only opportunities but also challenges. Good governance will be needed to enable future generations of Africans to benefit from this new wealth. Low global interest rates and high commodity prices have opened a window of opportunity for African countries to reform. This window will not always remain opened, and reform is needed now.

What role does China play in Africa’s economic development?

China’s economic performance shows that a transformational agenda can succeed and lift a large segment of the population out of poverty. Beyond being a benchmark, China has become the largest single trading partner for sub-Saharan Africa, with a 17 percent share of total trade. In comparison, India has a 6 percent share and Brazil, a 3 percent share. The so-called Group of Five (Indonesia, Malaysia, Saudi Arabia, Thailand and the United Arab Emirates) accounts for only 5 percent of sub-Saharan Africa’s total trade.

China also accounts for 16 percent of total foreign direct investment to sub-Saharan Africa and has become a key investor and provider of aid. There is no doubt that China is interested in Africa’s natural resources (such as copper in Zambia and oil in Nigeria and Sudan), but it is expanding its focus. Over 2,000 Chinese enterprises are investing and developing in more than 50 African countries, and South Africa is the leading recipient of Chinese foreign direct investment.

The key advantage of China in Africa is speed. Chinese firms are able to deliver quickly and work in close coordination with their financial and other national partners. Speed is a big comparative advantage in Africa. For instance, the continent has large infrastructure needs and African policymakers are under pressure to deliver. They are tempted to agree to an offer to build a coal-generated power plant in a couple of years when their population and businesses are getting increasingly disgruntled by sometimes daily power outages. They agree to this at the expense of adopting less polluting technologies.

What are the African countries to which we should being paying close attention?

South Africa has always been a key recipient of foreign investment given the sophistication of its economy.

In addition, natural resource-rich countries in Africa such as Angola and Nigeria will remain a key destination of foreign investment, especially given that the number of resource-rich countries will only increase with recent advancements in offshore oil exploration and extraction. In fact, Japanese Prime Minister Shinzo Abe recently visited Mozambique to secure natural gas contracts. Countries in the East African Community, such as Kenya, Uganda and Tanzania, are now discovering oil. Metal-exporting countries such as Burkina Faso, Ghana and Tanzania are also attractive.

As a non-natural resource-rich country, Ethiopia has a large population of more than 80 million people, high GDP growth, and a government-led strategy to attract foreign investment in some sectors. Rwanda is a smaller economy but it is growing rapidly and is trying to leverage its membership to the East African Community. In West Africa, Côte d’Ivoire is fast recovering from armed conflict, and Ghana remains a darling of foreign investors.

What are key areas of opportunity to capitalize on for Africa’s development?

Large infrastructure projects in Africa need foreign partners. Infrastructure spending in Africa is estimated to reach $93 billion per year, and tax revenues and other domestic resources will not be enough to fill the financing gap for infrastructure projects.

Information and communications technology (ICT) needs remain high in spite of the rapid growth in mobile phones and mobile banking. Major companies, including Google, Microsoft, Huawei and GE, are betting on the continent and investing in research and development.

The rising African middle class is also attracting investors in the retail sector. For instance, French supermarket chain Carrefour and American big box store Walmart have expanded their operations to Africa. Banking is also attractive given the low financial depth in Africa. Foreign investors are now innovating to focus on urban centers with a high potential for consumer spending. In 2020, the household spending of Alexandria, Cairo, Cape Town, Johannesburg and Lagos will total $25 billion dollars.

One untapped area is agriculture for major investment. Africa has about half of the planet’s arable land and there are potentially large expected returns from this sector, especially if its infrastructure gap is reduced.

Finally, portfolio investments in equity markets, domestic bond markets, and Eurobond markets are increasing and private equity firms are increasingly investing in the region. In 2013, the MSCI African Frontier Market (equity) index was up 28.5 percent and $10.7 billion of sovereign bonds were issued by capital markets in Africa. There are now five times more sovereign ratings in Africa than there were in 2000.

Is the whole continent progressing or are only a few countries?

The extent to which overall growth is shared by the 54 countries in Africa is quite impressive. This being said, some trouble spots remain. While some fragile countries like Liberia, Sierra Leone and especially Rwanda have been able to move forward from unfortunate legacies of violence and in some cases even genocide, the situation in other countries is worsening, particularly in the Central African Republic and South Sudan (which is oil-rich). In spite of recent progress, the situation also remains fragile in the east of the Democratic Republic of the Congo and in Mali, and press reports often remind us of the piracy situation in Somalia’s Gulf of Aden and terrorist acts by al-Shabab. Even in the north of Nigeria there is violence attributed to Boko Haram as well as piracy in the Gulf of Guinea. There is a need to build an African-owned framework and response mechanism to prevent and resolve violent conflict and crises in the continent.

African efforts to increase economic integration are helping to strengthen regional growth as well. Economic and trade integration across Africa will help foreign investors access larger markets and reduce transaction costs, including costs associated with regional infrastructure projects. African countries are trying to strengthen regional integration through regional economic communities and are negotiating free trade agreements and customs unions with the goal of ultimately having common currencies. We are far from one common African currency for the continent but we are beginning to some steps forward in this area. The East African Community—which includes Burundi, Kenya, Rwanda, Tanzania and Uganda—is a market of 150 million people and is set to become a monetary union soon. The former French colonies in Africa all use the same currency, which is pegged to the euro and have common institutions.

What is striking is that there is a consensus in African policy circles that we are witnessing Africa’s moment. The challenge will be in implementing the policy roadmap quickly as there is little time left for transformation. The World Bank notes that half of the region’s population is under 25 years of age. Each year between 2015 and 2035, there will be 500,000 more 15-year-olds than the year before. The challenge will be to transform this youth bulge into an opportunity.

Amadou Sy is a senior fellow in the Africa Growth Initiative and currently serves as a member of the Editorial Board of the Global Credit Review. His research focuses on banking, capital markets, and macroeconomics in Africa and emerging markets.

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